Korean industrial policy, which has guided the Korean economy through nearly three decades of spectacular growth, is showing its age. The policy has not been adjusted fully to the new challenges facing the economy, and it has not recognized the obsolescence of tis key instruments. This paper argues that the time has come, as in other advanced industrial countries, to disengage the government from managing the economy’s structural development and to adopt a new compact to delineate the responsibilities of business and government. Under this compact, responsibility for allocating investable funds would be shifted fully to the industrial and financial sectors, but at the price of greater competitive disciplines and regulatory oversight. Establishing this new framework presents an enormous challenge to policy. In addition to complexities of the transition, the government will have to maintain macroeconomic stability and the momentum of savings and investment, tackle the “new” market failures associated with Korea’s rising technological level. (The rest omitted)